Collusion in Multiple Object Simultaneous Auctions: Theory and Experiments

The choice of strategies by bidders who are allowed to communicate in auctions are studied. Using the tools of mechanism design, the possible outcomes of communication between bidders participating in a series of simultaneous first-price auctions are investigated. A variety of mechanisms are incentive compatible when side payments are not allowed. When attention is restricted to mechanisms which rely only on bidders' ordinal rankings of markets, incentive compatibility is characterized and the ranking mechanism of Pesendorfer (1996) is shown to be interim incentive efficient. Laboratory experiments were completed in order to investigate the existence, stability, and effect on bidder and seller surplus of cooperative agreements in multiple object simultaneous first-price auctions. Collusive agreements stable in the laboratory. The choices of the experimental subjects often closely match the choices predicted by the ranking and serial dictator mechanisms presented earlier. However, a few notable exceptions raise interesting prospects for the theoretical development of models of cooperative behavior.